98.7% of B2B products and services are underpriced.
It’s is real money business owners are leaving on the table.
Today we’re going to talk about:
- 18 signs you’re likely undercharging
- How to communicate a price increase
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18 signs your pricing is too low
When Steve Job’s returned to Apple in 1997, the business was forever changed.
When Jobs returned, he wasted no time changing the business completely. He slashed product lines, revamped others, and ultimately launched the iMac. The iMac was priced higher than its PC competitors which was intentional: Steve and Apple wanted to send the signal that Apple was a premium brand, delivering unmatched quality and design.
But he didn’t stop there.
As we now know, Steve and Apple completely changed the trajectory of the technology market by launching the iPod, iPhone, and iPad. Each product, unsurprisingly, carried the same premium positioning.
The results are undeniable, no matter what you think about their products. Market Capitalization went from $2 billion in 1997 to $350 billion in 2011, at the time of Job’s passing. Today, Apple remains one of the world’s most valuable companies, with a market capitalization of well over $2 trillion.
So, what made Apple different with Steve Jobs?
It was all about positioning.
When looking at positioning, you can break it down to 2 levers:
- Price
- Quality
Steve was a master at communicating how they were different than the competitor and creating a culture around the product.
Apple, in turn, captured the high-price, high-quality portion of the market.
Other brands, like Dell, positioned them as high quality but low price, or the value delivering brand.
Still, others chose to become a utility… we’ll help you get done what you need to get done at the lowest price.
So, why are we talking about positioning?
We’re talking positioning because this will inform your approach to pricing.
Walmart’s tagline is “Save money. Live better.” They’re being very clear who they are: the low cost leader in the market.
If Walmart raised prices, it would lose much of its customer base to the lower-cost option.
So, before we can discuss pricing, we have to ask: how are you positioning your business?
If you’re positioned as the low-quality, low-price option, you might be underpriced but you also might not be. You will always have downward pressure on your prices, though I’m still you can still learn something from these rules.
For the rest of you, you’re underpriced by an average of 5.6%.
What does that mean? For a business with $5 million in Revenue and a 15% Profit Margin, that increases your profit by $280,000 to 20.6% Profit Margin.
Correcting underpricing can completely transform your business, so let’s look at the signs your pricing is too low.
18 signs your pricing is too low
- Low-profit margins: Low-profit margins could mean your expenses are too high, but if you’ve already cut it’s likely you’re undercutting yourself.
- High demand, low supply: When you can’t keep up with demand and can’t increase supply, your customers and your business are primed for a price increase. When waits are long, consumers welcome shorter wait times. Increasing your price could create some attrition, but it’ll make those who stick around appreciate the product/service more.
- Competitors' higher prices: Too many businesses don’t keep up with market rates. They set prices low when starting out and then never “survey the field” again to see where they compared to their competitors.
- Price sensitivity: Have you increased prices in the past and gotten no customer pushback? You’re likely still undervaluing your service today. Raising prices should cause some sort of attrition. If you raise them and don’t have any, that’s generally a bad sign. Don’t wear your customers out with another increase, but make sure you start charging new customers higher prices immediately.
- Rapid inventory turnover: People generally get this, but they have a scarcity mindset. “When I get the new stock in, those are the last people that will want it.” Yes, inventory is hard. But if you’re constantly selling out quickly (unless it’s part of the plan), you need to increase your price and improve your cash conversion cycle (so you can order in bigger quantities).
- High customer acquisition costs: If you’re spending a lot of money to acquire customers, it’s likely you’re underpriced. This may seem counterintuitive, but high customer acquisition increases the cost of each customer. That means you have to have a higher price to afford the customer acquisition cost.
- Low perceived value: Are customers not following through with their projects? Are they discounting your experience and expertise? They’re likely undervaluing what you offer, which means you’re not charging enough.
- You’re delivering more than is being paid for: Especially with services, it’s easy to let scope creep enter the picture. It sounds good (and feels good) to deliver more than expected. There is a time and place to do this, but it’s rare. When you overdeliver, that starts to become the expectation.
- Lack of funds for growth: If you’re making just enough to get buy, you don’t actually have a business… you have a job. A business creates enough cash flow to support growth and expansion. Whether that be to fund inventory or assets or to higher employees would grow your firm, your inability to afford these things means you’re undercharging.
- Your clientele isn’t aligned: Does it feel like you’re getting the wrong customers? Do they feel like they don’t meet your standard? Raise your price. This alone could attract the right ones even without changing anything else.
- Your costs are increasing: No customer expects you to take on the additional costs. Okay, yes the bad customer will… but you don’t want that customer anyways.
- You have more experience: Have you done one job since you set your price? Then you have more experience. Experience should be “priced in.” People want experience and are generally willing to pay for it.
- You have no room for advertising, marketing, or research & development: These are the cost of doing business. Many business owners brag that they’re all “word of mouth.” To me, that just tells me they’re not living up to their potential. If you can’t afford these “overhead” costs, you’re on the verge of irrelevance.
- You can’t afford to pay your top talent more: Top performers can produce 5-10x more than the mediocre or good ones, so you have to be willing (and able) to pay them to stay. If you find yourself pinching pennies with them, you’re already on the road to losing them.
- You can’t afford to offer discounts: While I’m not a big proponent of offering discounts, the inability to do so means you’re actually giving everyone a discount. Create pricing that allows you to give discounts when it’s appropriate.
- You can’t seem to get a financial cushion: A successful business should have you asking “what can I even do with this excess cash?” If you’re struggling to get enough cash reserves to be comfortable, you need to raise your rates. This will feel like a risk, but you’re already at risk anyways… so what do you have to lose?
- Your win rate is too high: Sure you’re high-fiving because you keep winning jobs. But, could it be because you’re in a race to the bottom? A win rate significantly higher than industry averages is a sign you’re underpricing your services. The result is lower and lower profits, eventually getting to unsustainable levels.
- Most clients are charged hourly: Hourly billing caps your earning potential and means your clients get all the upside. If you’re delivering value, some of that value delivery should be returned to you. Sure, maybe it’s risking to price based on result… but you believe in yourself, right?
How to raise your prices
I could break down the step-by-step process of analyzing your prices, the market, and your customers to get to the right price, but that is a newsletter article in and of itself.
(If you want to see that, reply to this email with “teach me how to price-ie”)
Instead, let’s discuss how to communicate your raised prices to your customers.
Clarify the benefit
I’ve always found that it’s best to be clear why you’re increasing them, but to not offer too much detail.
“We’re increasing prices because our suppliers costs have gone up.” Unless it’s an extremely situation, you don’t need to share amounts or “get all intimate.”
No one likes it when someone goes deep too quick and it opens you up to questions you may not want to answer.
Focus on the value they’ll get. “These increases will allow us to continue to prioritize the best customer service in the industry.” Remind them why they’re doing business with you!
Announce and go
When increasing prices, some customers won’t care and others will.
Announce the plan to increase with ample time for customers to make a switching decision if they may. This is generally at least 30 days.
But, don’t put too much focus on this switch. The ones that need additional attention will come to you. The rest will go about their business. For some, the price change will come and go without a blink. If you instead make a big deal out of it, it could stop them in their tracks.
If you give them a sense they should have a problem, they might create one.
So, give notice and move on. Deal with the questions and complaints as they come and address them with empathy. But for the rest? It’s business as usual.
Offer an out
For those that do have questions, be prepared to give them options. You can’t back off a price increase, but you can temporarily suspend it or offer new terms.
In some cases, offering shorter payment terms could be more beneficial than the price increase in the first place.
Consider your options BEFORE you make a change and be mentally prepared to respond to customer requests.
Annual increases
We tend to overcomplicate it. Don’t. Come up with a plan, work the plan, and get back to work.
One way to forego these difficult conversations is to build annual price increases into the contract. Sometimes these have percentage increase limits, other times they don’t. But by addressing this issue up front, you save yourself from the difficult conversation later.
People get used to the status quo. If the status quo is the same price for 5 years, the customer will be upset. But if it’s a small increase every year, they likely don’t bat an eye.
Something Interesting
- In researching for this issue I came across this article that looked at brand type it was good food for thought. Check it out and consider how your businesses fit into that framework.
- This week I received the book Outlive: The Science & Art of Longevity by Peter Attia in the mail. As a new dad, I've been thinking a lot about how to extend lifespan and Dr. Attia tackles that in this book. If you're interested in your health, I encourage you to check it out.
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See you next week,
-Kurtis
